Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). YES ¨ NO x

The number of shares of Registrants common stock outstanding as of February 8, 2005:
19,186,961

Accounts receivable, net of allowance for doubtful accounts of $71 and $14 at December 31, 2004 and March 31, 2004,
respectively

6,393

3,770

Unbilled accounts receivable



50

Prepaids and other current assets

566

670

Total current assets

15,725

14,517

Property and equipment, net

565

495

Other assets

294

282

Total assets

$

16,584

$

15,294

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND

STOCKHOLDERS DEFICIT

Current liabilities:

Accounts payable

$

674

$

407

Accrued expenses

1,008

522

Accrued compensation

1,663

1,589

Deferred revenue

7,954

7,987

Current portion of notes payable

1,875

1,875

Capital lease obligations



55

Total current liabilities

13,174

12,435

Deferred revenue, long-term portion

144

516

Notes payable, less current portion

438

1,094

Redeemable convertible preferred stock, $0.001 par value:

Authorized shares  3,200,000 (2,000,000 designated as Series A and 1,200,000 designated as Series B) at December 31, 2004 and March 31,
2004

Issued and outstanding shares  1,869,085 and 1,850,943 at December 31, 2004 and March 31, 2004, respectively (1,814,662 designated as
Series A at December 31, 2004 and March 31, 2004 and 54,423 and 36,281 designated as Series B at December 31, 2004 and March 31, 2004, respectively), aggregate redemption and liquidation value - $7,491 at December 31, 2004 and $7,419 at March 31,
2004

6,266

6,164

Commitments and contingencies

Stockholders deficit:

Preferred stock, $0.001 par value:

Authorized shares  1,800,000 at December 31, 2004 and March 31, 2004

Issued and outstanding shares - none at December 31, 2004 and March 31, 2004





Common stock, $0.001 par value:

Authorized shares  120,000,000 at December 31, 2004 and March 31, 2004

Issued and outstanding shares  19,134,457 and 19,058,453 at December 31, 2004 and March 31, 2004, respectively

Pharsight Corporation was incorporated in the State of California in April 1995, and we reincorporated in the State of Delaware in June 2000.

We develop and market software and provide strategic consulting services that help
pharmaceutical and biotechnology companies improve their efficiency and decision making, while reducing the costs and time requirements of their drug discovery, development, and commercialization efforts.

The accompanying financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with our financial statements and notes thereto included in our
Annual Report on Form 10-K for the fiscal year ended March 31, 2004.

The
interim financial statements are unaudited but reflect all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the results of these periods. The results of operations for the three and nine
months ended December 31, 2004 are not necessarily indicative of results to be expected for the fiscal year ending March 31, 2005, or any other period.

Certain prior period amounts have been reclassified in greater detail to conform to the current period classification. The reclassification had no impact on our
historical results of operations or financial position.

We operate in two
reportable business segments: Software Products and Strategic Consulting. See Note 4.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period.

Our revenues are derived from two primary sources: (1) initial and renewal fees for term-based and perpetual product licenses, and (2) services related to scientific and
training consulting and software deployment.

Our revenue recognition policy is
in accordance with Statement of Position No. 97-2, Software Revenue Recognition, (or SOP 97-2) as amended. For each arrangement, we determine whether evidence of an arrangement exists, delivery has occurred, the fee is fixed
or determinable, collection is probable, and no significant post-delivery obligations remain unfulfilled. If any of these criteria are not met, we defer revenue recognition until such time as all of the criteria are met. We do not currently offer,
have not offered in the past, and do not expect to offer in the future, extended payment term arrangements. If we do not consider collectibility to be probable, we defer recognition of revenue until the fee is collected.

We have contracts from which we receive solely license and renewal fees consisting of
one-year software licenses (initial and renewal fees) bundled with post contract support services, or PCS. We do not have vendor specific objective evidence to allocate the fee to the separate elements, as we do not sell PCS separately. We,
therefore, do not present PCS revenue separately, and we do not believe other allocation methodologies, namely allocation based on relative costs, provide a meaningful and supportable allocation between license and PCS revenues. We recognize each of
the initial and renewal license fees ratably over the one-year period of the license during which the PCS is expected to be provided as required by paragraph 12 of SOP 97-2.

For arrangements consisting solely of services, we recognize revenue as services are performed. Arrangements for
services may be charged at daily rates for different levels of consultants and out-of-pocket expenses, or may be charged as a fixed fee. For fixed fee contracts, with payments based on milestones or acceptance criteria, we recognize revenue as such
milestones are achieved, or upon acceptance, which approximates the level of services provided. For fixed fee arrangements, we recognize revenue based on the lower of (1) an estimation of the percentage of completion on contracts on a monthly basis
utilizing hours incurred to date as a percentage of total estimated hours to complete the project, or (2) hours incurred to date multiplied by our contracted per diem rates. For fixed fee contracts with payments based on milestones, we recognize
revenue on partially completed milestones based on the lower of (1) an estimation of the percentage of completion on partially completed milestones on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to
complete the milestone, or (2) hours incurred to date subsequent to the last fully-completed milestone, multiplied by our contracted per diem rates, not to exceed the total revenue to be earned upon achievement of such completed milestone. If we do
not have a sufficient basis to measure progress toward completion, revenue is recognized when we receive final acceptance from the customer. When total cost estimates exceed revenues, we accrue for the estimated losses immediately based upon an
average fully burdened daily rate applicable to the services organization delivering the services. The complexity of the estimation process and the issues related to the assumptions, risks and uncertainties inherent with the application of the
percentage-of-completion method of accounting affect the amounts of revenue and related expenses reported in our consolidated financial statements. A number of internal and external factors can affect our estimates, including labor rates,
utilization and efficiency variances, specification and testing requirement changes, and unforeseen changes in project scope.

We enter into arrangements consisting of one-year licenses (bundled with PCS), renewal fees and scientific consulting services. The scientific consulting services
meet the criteria of paragraph 65 of SOP 97-2 for separate accounting, in that they are not essential to the functionality of the delivered software, are described separately in the arrangement and are sold separately. We recognize license revenues,
including license revenue from bundled PCS, on a straight line basis over the PCS term. We recognize revenues from scientific consulting services as these services are provided or upon their acceptance, if applicable. We have established vendor
specific objective evidence for services, therefore we recognize revenue when services are performed or completed. Vendor specific objective evidence of fair value of scientific services for purposes of revenue recognition in these multiple element
arrangements is based on daily rates for different levels of consultants and out-of-pocket expenses.

We also have arrangements that consist of perpetual and term-based licenses, PCS and implementation/installation services. For arrangements involving a significant amount of services related to installation and
implementation of our software products, we recognize revenue for the entire arrangement ratably over the remaining period of the PCS term once the implementation and installation services are completed and accepted by the customer. We currently do
not have vendor specific objective evidence for PCS.

Basic net income (loss) per share attributable to common
stockholders is computed by dividing net income or loss attributable to common stockholders for the period by the weighted-average number of shares of vested common stock (i.e. not subject to a right of repurchase) outstanding during the period.

Diluted net income (loss) per share attributable to common stockholders is
computed by dividing net income attributable to common stockholders for the period by the weighted-average number of shares of vested common stock outstanding and, where dilutive, weighted average number of shares of unvested common stock
outstanding. Diluted net income (loss) per share attributable to common stockholders also gives effect, as applicable, to the potential dilutive effect of outstanding stock options and warrants to purchase common stock using the treasury stock
method, and convertible preferred stock using the as-if-converted method, as of the beginning of the period presented or the original issuance date, if later.

The following table presents the calculation of basic and diluted net income (loss) per share (in thousands, except per share data):

Three Months Ended

December 31,

Nine Months Ended

December 31,

2004

2003

2004

2003

Net income (loss)

$

1,411

$

(327

)

$

1,926

$

(2,305

)

Preferred stock dividend

(145

)

(145

)

(465

)

(436

)

Deemed dividend to preferred stockholders







(339

)

Net income (loss) attributable to common stockholders

$

1,266

$

(472

)

$

1,461

$

(3,080

)

Dilutive effect of preferred stock dividends

145



465



Net income (loss) attributable to common stockholders after assumed conversions

$

1,411

$

(472

)

$

1,926

$

(3,080

)

Weighted average common shares outstanding

19,117

19,054

19,088

19,053

Less weighted average common shares subject to repurchase



(2

)



(4

)

Weighted average common shares used to compute net income (loss) per share attributable to common stockholders

19,117

19,052

19,088

19,049

Dilutive effect of employee stock options, awards and as if converted preferred stock

All potential common equivalent shares including preferred stock (on an as-if-converted basis), have been excluded from
the computation of diluted net income (loss) attributable to common stockholders per share because the exercise prices of the stock options and as if converted preferred stock were greater than or equal to the average share price for the quarter,
and therefore their inclusion would have been anti-dilutive. These options could be dilutive in the future if the average share price increases and is greater than the exercise price of these options.

The number of unvested and potential common shares excluded from the calculation of net
income (loss) per share applicable to common stockholders at December 31, 2004 and 2003 due to antidilution is detailed in the following table (in thousands):

We generally grant stock options to our employees for a fixed number
of shares with an exercise price equal to the fair market value of the stock on the date of grant. As permitted under the Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation
(FAS 123) and SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure (FAS 148), we have elected to follow the intrinsic value method of accounting as defined by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for stock awards to employees. Accordingly, no compensation expense is recognized in our financial
statements in connection with employee stock awards where the exercise price of the award is equal to the fair market value of the stock at the date of the award. When stock options are granted with an exercise price that is lower than the fair
market value of the stock on the date of grant, the difference is recorded as deferred compensation and amortized to expense on a graded basis over the vesting term of the stock options.

As required by FAS 148, the following table illustrates the effect on net income (loss) per share if we had accounted for our stock option
and stock purchase plans under the fair value method of accounting (in thousands, except per share amounts):

Three Months Ended

December 31,

Nine Months Ended

December 31,

2004

2003

2004

2003

Net income (loss) attributable to common stockholders, as reported

$

1,266

$

(472

)

$

1,461

$

(3,080

)

Add back:

Stock-based employee compensation included in reported net loss



42



159

Less:

Total stock-based compensation expense determined under the fair value method for all awards

(181

)

(169

)

(491

)

(585

)

Pro forma net income (loss) attributable to common stockholders

$

1,085

$

(599

)

$

970

$

(3,506

)

Basic net income (loss) per share attributable to common stockholders

As reported

$

0.07

$

(0.02

)

$

0.08

$

(0.16

)

Pro forma

$

0.06

$

(0.03

)

$

0.05

$

(0.18

)

Diluted net income (loss) per share attributable to common stockholders

We estimate the fair value of our options using the Black-Scholes option value model, which was developed for use in
estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Our employee stock
options have characteristics significantly different than those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimates. In managements opinion, therefore, the existing models do not
necessarily provide a reliable single measure of the fair value of our employee stock options. The fair value of options granted and the option component of the employee purchase plan shares were estimated at the date of grant, assuming no expected
dividends, and with the following weighted average assumptions:

Options

ESPP

Three Months Ended

December 31,

Nine Months Ended

December 31,

Three Months Ended

December 31,

Nine Months Ended

December 31,

2004

2003

2004

2003

2004

2003

2004

2003

Expected life (years)

3.26



3.73

3.74





0.50



Expected stock price volatility

206.5

%



150.4

%

210.0

%





86.0

%



Risk-free interest rate

3.25

%



3.25

%

1.70

%





1.00

%



We did not grant any options during
the three months ended December 31, 2003. Further, in conjunction with the transfer of our securities from the Nasdaq National Market to the Over-The-Counter Bulletin Board system and in accordance with the terms of the Employee Stock Purchase Plan,
we suspended new offerings under the Employee Stock Purchase Plan from January 2003 until February 2004, at which time the shares could be issued pursuant to a permit under applicable state laws.

The following table shows the amount of amortization of deferred stock compensation excluded
from cost of revenues and certain operating expenses in the Statements of Operations (in thousands):

Comprehensive income (loss) consists of net income (loss) adjusted
for the effect of unrealized holding gains or losses on available-for-sale securities and foreign currency translation adjustments. The foreign currency translation adjustments for the three and nine months ended December 31, 2004 were $1,000 and
$16,000, respectively. There was no accumulated comprehensive gain (loss) at March 31, 2004.

We receive a substantial majority of our revenue from a limited number of customers. For the three and nine months ended December 31, 2004, sales to our top two customers accounted for 51% and 47% of total revenue, respectively, and sales
to our top five customers in the same periods accounted for 72% and 63% of total revenue, respectively. For the three and nine months ended December 31, 2003, sales to our top two customers accounted for 28% and 26% of total revenue, respectively,
and sales to our top five customers in the same periods accounted for 54% and 48% of total revenue, respectively. For fiscal 2004, 2003 and 2002, sales to our top two customers accounted for 28%, 28% and 29% of total revenue, respectively, and sales
to our top five customers in the same periods accounted for 50%, 50% and 49% of total revenue, respectively. One customer accounted for 34% and 15% of total revenues for the three months ended December 31, 2004 and 2003, respectively. Another
customer accounted for 17% and 13% of total revenues for the three months ended December 31, 2004 and 2003, respectively.

Two customers comprised 34% and 16% of accounts receivable at December 31, 2004. Four customers comprised 22%, 20%, 14% and 14% of accounts receivable at March 31, 2004.

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards No. 123R,
Share-Based Payment, or SFAS 123R, which is a revision of Statement of Accounting Standards No. 123, Accounting for Stock-Based Compensation. SFAS 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and amends Statement of Accounting Standards No. 95, Statement of Cash Flows. SFAS 123R requires all companies to measure compensation expense for all share-based payments (including employee stock options and options
issued pursuant to employee stock purchase plans) based upon the fair value of the stock-based awards at the date of grant. SFAS 123R is effective for all public companies for interim or annual periods beginning after June 15, 2005. Retroactive
application of the requirements of FASB Statement No. 123 to the beginning of the fiscal year that includes the effective date would be permitted, but not required. Early adoption of Statement 123R is encouraged. The impact of adoption of Statement
123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future.

In May 2004, we renegotiated, extended and expanded our accounts receivable credit facilities with Silicon Valley Bank for an additional year, providing for up to $3.0 million in borrowings, secured against 80% of
eligible domestic accounts receivable. At December 31, 2004, $1.0 million of the accounts receivable facility had been utilized and a remaining secured term loan balance of $1.3 million was outstanding. Interest is accrued at 0.5% above prime and is
payable monthly from the date of borrowing. The revolving credit facility expires in May 2005. Certain of our assets, excluding intellectual property, secure both the accounts receivable and term loan facilities. The following financial covenants
apply to the extended Silicon Valley Bank credit facilities: net loss no greater than $500,000 in the first quarter of fiscal 2005, net income of at least $1.00 in the remaining three quarters of fiscal 2005; minimum modified quick ratio (defined as
cash and cash equivalents plus accounts receivable, divided by total current liabilities, including all bank debt, but not including deferred revenue) of 1.5:1 for the months of April 2004 through July 2004, 1.75:1 for the months of August 2004
through November 2004, and 2:1 for the months of December 2004 and each month thereafter. We were in compliance with each of these covenants at December 31, 2004.

On June 1, 2004, (the Valuation Date), we issued a dividend in the form of 18,142 shares of Series B Redeemable Convertible Preferred Stock (Series B
Preferred) to our Series A Preferred shareholders, at the election of the Series A Preferred shareholders. The Series B Preferred has identical rights, preferences and privileges as the Series A Preferred, except that the Series B Preferred is
not entitled to the dividend payment right. Due to the nature of the redemption features of the Series B Preferred, we have excluded the Series B Preferred from stockholders equity in our financial statements. (We refer the reader to the
discussion of the Preferred Stock Financing in Note 8  Preferred Stock, in the Notes to Financial Statements contained in Item 8 of our Annual Report on Form 10-K, filed on June 15, 2004.) During the three and nine months ended December 31,
2004, we paid cash dividends of $145,000 and $363,000 to our Series A Preferred shareholders.

The amount of the Series B Preferred dividend was determined based on the estimated per share fair value of the Series B Preferred Stock. To record the fair value of the Series B Preferred Stock, we performed a
valuation based on our 5-day average stock price leading up to and including the Valuation Date. Various factors including, but not limited to, deemed time to liquidity and form of dividend payment were considered in the valuation of the Series B
Preferred Stock. The estimated fair value of the Series B Preferred Stock issued on June 1, 2004 was $102,000 or $5.61 per share of Series B Preferred Stock. The equivalent as-converted common stock per-share value was $1.40, representing a premium
of 7.7% over our then-current common stock price of $1.30.

Segment information is presented in accordance with SFAS 131,
Disclosures about Segments of an Enterprise and Related Information. This standard is based on a management approach, which requires segmentation based upon our internal organization and reporting of revenue and operating income based
upon internal accounting methods. Our financial reporting systems present various data for management to run the business, including internal profit and loss statements prepared on a basis not consistent with accounting principles generally accepted
in the United States. Not all assets are allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment and it is impracticable
for the Company to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.

Our Chief Operating Decision Maker (CODM), as defined by SFAS No. 131, is our Chief Executive Officer. The
CODM allocates resources to and assesses the performance of each operating segment using information about their revenue and operating profit before interest and taxes. Our segments are designed to promote better alignment of strategic objectives
between development, sales, marketing and services organizations; provide for more timely and rational allocation of development, sales and marketing resources within businesses; and for long-term planning efforts on key objectives and initiatives.
The segments are used to allocate resources internally and provide a framework to determine management responsibility. Intersegment sales costs are estimated by management and used to compensate or charge each segment for such shared costs, and to
incent shared efforts. Management will continually evaluate the alignment of sales and inter-segment commissions for segment reporting purposes, which may result in changes to segment allocations in future periods.

We operate in two operating segments, which are also our reportable segments: Software
Products and Strategic Consulting. These segments were determined based on how management and our CODM view and evaluate Pharsights business.

Our Software Products segment consists of software products and software deployment and integration services that provide the analytical tools and conceptual framework to
help clinical researchers optimize the decision-making required to perform clinical testing needed to bring drugs to market. By applying mathematical modeling and simulation to all available information regarding the compound being tested,
researchers can clarify and quantify which trial and treatment factors will influence the success of clinical trials.

Our Strategic Consulting segment consists of consulting, training and process redesign conducted by our clinical and decision scientists in the application and
implementation of our core decision methodology. Our methodology enables customers to identify which uncertainties about a drugs efficacy and safety are greatest and matter most, and then design development programs, trial sequences, and
individual trials in such a way that those trial systematically reduce the identified uncertainties, in the most rapid and cost-effective manner possible.

Summarized financial information on our reportable segments is shown in the following table (in thousands):

Three Months Ended

December 31,

2004

2003

SoftwareProducts

StrategicConsulting

Corporate &ReconcilingAmounts

Total

SoftwareProducts

StrategicConsulting

Corporate &ReconcilingAmounts

Total

Revenues:

License and renewal

$

3,571

$



$



$

3,571

$

1,899

$



$



$

1,899

Services

582

2,309



2,891

385

2,299



2,684

Total revenues

4,153

2,309



6,462

2,284

2,299



4,583

Gross margin

3,597

917



4,514

1,575

924



2,499

Income (loss) from operations

1,397

187

(94

)

1,490

(155

)

(59

)

(58

)

(272

)

Nine Months Ended

December 31,

2004

2003

SoftwareProducts

StrategicConsulting

Corporate &ReconcilingAmounts

Total

SoftwareProducts

StrategicConsulting

Corporate &ReconcilingAmounts

Total

Revenues:

License and renewal

$

7,951

$



$



$

7,951

$

5,484

$



$



$

5,484

Services

1,358

7,259



8,617

761

6,082



6,843

Total revenues

9,309

7,259



16,568

6,245

6,082



12,327

Gross margin

7,907

3,055



10,962

4,592

2,100



6,692

Income (loss) from operations

1,899

306

(94

)

2,111

(981

)

(879

)

(230

)

(2,090

)

Corporate and reconciling amounts
include adjustments to state operating income in accordance with U.S. GAAP and corporate level expenses not specifically attributed to a segment. Corporate and reconciling items to income (loss) from operations include unallocated general and
administrative expenses of $94,000 and $94,000 in the three and nine months ended December 31, 2004, respectively. Corporate and reconciling items to income (loss) from operations include unallocated general and administrative expenses of $16,000
and $71,000 and amortization of deferred stock compensation of $42,000 and $159,000 in the three and nine months ended December 31, 2003, respectively. There were no inter-segment revenues for the periods shown above.

From time to time and in the ordinary course of business, we may be subject to various
claims, charges, and litigation. In the opinion of management, final judgments from such pending claims, charges, and litigation, if any, against us, would not have a material adverse effect on our financial position, result of operations, or cash
flows.

From time to time, we enter into certain types of contracts that contingently require us to
indemnify parties against third party claims. These obligations relate to certain agreements with our officers, directors and employees, under which we may be required to indemnify such persons for liabilities arising out of their employment
relationship. Other obligations relate to certain commercial agreements with our customers, under which we may be required to indemnify such parties against liabilities and damages arising out of claims of patent, copyright, trademark or trade
secret infringement by our software. The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount
of the obligations cannot be reasonably estimated. Historically, we have not had to make any payments for these obligations, and no liabilities have been recorded for these obligations on our balance sheets as of December 31, 2004 or March 31, 2004.

Arthur Reidel, Chairman of our Board of Directors, is also a Venture Partner of Lightspeed
Venture Partners. Lightspeed Venture Partners is the venture group of The Weiss, Peck & Greer Entities, which in the aggregate hold 1,223,242 shares of common stock, representing approximately 6% of our outstanding shares as of December 31,
2004.

On January 19, 2005, we executed a new lease agreement for our office in Cary, North
Carolina. The lease term is for six years commencing when we move to the new facility, which is expected to be in April 2005. Rent is approximately $13,000 for the first year and escalates every year after.

The following discussion and certain other statements in this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the safe harbor created by those sections, including statements regarding anticipated operating expenses and
capital expenditures, revenue growth, revenue from sales to certain customers, expansion opportunities for our products and services, and our cash position and cash flow from operations. In some cases, forward-looking statements can be identified by
the use of words such as may, will, should, could, expect, plan, anticipate, believe, estimate, predict, assume,
potential, continue, intend, hope, can, or the negative of such terms or other comparable terminology. These statements are only predictions and involve known and unknown risks,
uncertainties and other factors, including without limitation the business risks discussed under the caption Item 2Managements Discussion and Analysis of Financial Condition and Results of OperationsFactors That May Affect
Future Results and Market Price of Stock in this Quarterly Report on Form 10-Q. These forward-looking statements involve risks and uncertainties that could cause our or our industrys actual results, levels of activity, performance or
achievements to differ materially from any future results, levels of activities, performance or achievements expressed or implied in such forward-looking statements. These business risks should be considered in evaluating our prospects and future
financial performance. Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our expectations are as of the date we file
this Quarterly Report on Form 10-Q, and we do not intend to update any of the forward-looking statements after the date we file this Quarterly Report on Form 10-Q to conform these statements to actual results, unless required by law.

Pharsight Corporation develops and markets software and services that help pharmaceutical and biotechnology companies improve productivity
and decision-making in drug development and commercialization. Our solutions combine proprietary computer-based simulation, statistical and data (PK/PD) analysis tools and data repositories with the sciences of pharmacology, drug and disease
modeling, human genetics, biostatistics and strategic decision-making. Our offerings, which consist of a portfolio of scientific and decision consulting services, software products and related services, help customers optimize clinical drug
development processes by quantifying the risk/reward ratio of commercialization and identifying probable outcomes. By integrating scientific, clinical and business decision criteria into a dynamic, model-based methodology, we help our customers add
value to their drug development programs and portfolios from the discovery phase to post-launch marketing and any point in between. We use computer-based drug-disease models, dynamic predictive market models, clinical trial simulation, advanced
valuation models and competitive compound analysis, to create a continuously evolving view of our customers development efforts and opportunities.

The use of our software and methodology is on the leading edge of the traditional drug-development process, which is heavily dependent upon clinical trials and patient
testing. Although our methodology does not displace the use of human trials in drug development, we believe our analysis software and our methodology renders human trials more efficient and relevant. The continued growth of our customer base, the
increase in the number of contracts with our customers, and the increase in our average contract values over time have shown a trend that we believe demonstrates increased acceptance of our methodology and an increased demand for its use. We believe
that this trend demonstrates a potential for long-term increased revenue growth, as well as long-term opportunities to expand the breadth and coverage of both our consulting services and software product offerings.

For reporting purposes, we operate in two business segments: Software Products and Strategic
Consulting. Our Software Products segment consists of software products and software deployment and integration services that provide the analytical tools and conceptual framework to help clinical researchers optimize the decision-making required to
perform clinical testing needed to bring drugs to market. Our Strategic Consulting segment consists of consulting, training and process redesign conducted by our clinical and decision scientists in the application and implementation of our core
decision methodology. These segments were determined based on how management and our Chief Operating Decision Maker (or CODM), who is our Chief Executive Officer, view and evaluate Pharsights business.

We achieved our first quarter of profitability in the fourth quarter of fiscal 2004. Prior to that time we had incurred losses since
inception. We currently have an accumulated deficit of approximately $77.8 million. To meet increased demand for our products and services, we may be required to invest further in our operations, technology and infrastructure, which may result in
our inability to sustain profitability. Although we believe we are currently experiencing increased demand for our consulting services, we may have difficulty expanding our capacity to deliver such services in a profitable manner, if at all.

Although we achieved positive operating cash flow in the fourth quarter of fiscal 2004 and third quarter of fiscal 2005,
we experienced negative cash flow in the first two quarters of fiscal 2005. Based on our forecasts, we believe that our current cash balances are sufficient to meet our working capital needs for at least the next twelve months. Our ability to
generate positive net cash flow and sustain positive operating cash flow on a quarterly and annual basis is based on a number of factors, including some which are outside of our control, such as the state of the overall economy, the demand for our
products and the length and lack of predictability of our sales cycle. As a result, we may need to raise additional funds through public or private financings or other sources to fund our operations. We may not be able to obtain additional funds on
commercially reasonable terms, or at all. Failure to raise capital when needed could harm our business. If we raise additional funds through the issuance of equity securities, these equity securities might have rights, preferences or privileges
senior to our common stock and preferred stock. In addition, the necessity of raising additional funds could force us to incur debt on terms that could restrict our ability to make capital expenditures and to incur additional indebtedness.

In the three and nine months ended December 31, 2004, we generated 64% and 56%
of our total revenues, or $4.2 million and $9.3 million, respectively, from software licenses, renewal fees and deployment services in our Software Products segment, compared to 50% and 51% of total revenues, or $2.3 million and $6.2 million, in the
three and nine months ended December 31, 2003, respectively. While we expect that the overall long-term revenue trend in our software business will continue to increase in response to customer demand, the revenue in individual quarters may fluctuate
significantly, based upon the timing of completion of large software installations and related revenue recognition. Unanticipated delays in deployment schedules may have significant impact on the timing of revenue recognition and may have a
corresponding significant impact to our net income in that quarter.

We
generate a significant portion of our revenue from a limited number of clients. We expect that a significant portion of our revenue will continue to depend on sales to a small number of clients. In addition, the worldwide pharmaceutical industry has
undergone, and may in the future undergo, substantial consolidation, which may reduce the number of our existing and potential clients. The loss of one of our large clients could hurt our business and prevent us from sustaining profitability.

Our clients may also expand their internal drug development organizations to
include functions and individuals that might perform services similar to those performed by our strategic consulting group. As a result, our consulting business could have difficulty sustaining its current levels of revenues, or increasing its
revenues in the future. Similarly, our clients may develop their own competing software solutions, or may choose to purchase similar products from third parties other than Pharsight. This could hurt our business and prevent us from increasing or
sustaining our software revenues.

The pharmaceutical industry in general has
recently experienced, and may continue to experience, forced withdrawal of certain drugs from the public market due to unforeseen safety risks. Our clients may, as a result, experience declines in their revenues, which may lead to reductions in
their current level of spending on software solutions and strategic consulting services. This could hurt our business and prevent us from increasing or sustaining our software and strategic consulting revenues.

We prepare our financial statements in accordance with U.S. generally accepted accounting
principles, or GAAP. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at
the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of
revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The primary critical accounting policy
that currently affects our financial condition and results of operations is revenue recognition. We believe that this accounting policy is critical to fully understand and evaluate our reported financial results.

Judgments affecting revenue recognition. Revenue results are difficult to predict,
and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter. We recognize revenue in accordance with U.S. generally accepted accounting principle rules that have been
prescribed for the software industry. The accounting rules related to revenue recognition are complex and are affected by continuing interpretations of the rules based, in part, on industry practices, which are subject to change. Consequently, the
revenue recognition accounting rules require management to make significant judgments.

We do not record revenue on sales to customers whose ability to pay is in doubt at the time of sale. Rather, we recognize revenue on sales to such customers as cash is collected. The determination of a customers ability to pay
requires significant judgment. In this regard, management considers the geographical domicile and the financial viability of the customer in assessing a customers ability to pay.

We generally do not consider revenue arrangements with extended payment terms to be fixed or determinable and,
accordingly, we do not generally recognize revenue on the majority of these arrangements until the customer payments become due. The determination of whether extended payment terms are fixed or determinable requires management to exercise
significant judgment, including assessing such factors as the past payment history with the individual customer and evaluating the risk of concessions over an extended payment period. The determinations that we make can materially affect the timing
of recognition of revenues. Our normal payment terms currently range from net 30 days to net 60 days, which are not considered by us to be extended payment terms.

The majority of our PKS software arrangements include software deployment services. We defer revenue for software deployment services, along
with the associated license revenue, until the services are completed and accepted. If there is significant uncertainty about the project completion or receipt of payment for the professional services, we defer revenue until the uncertainty is
sufficiently resolved.

Additionally, for fixed fee contracts, with payments
based on milestones or acceptance criteria, we recognize revenue as such milestones are achieved or upon acceptance, which approximates the level of services provided. Management makes a number of estimates related to recognizing revenue for such
contracts. The complexity of the estimation process and the issues related to the assumptions, risks and uncertainties inherent with the application of the percentage-of-completion method of accounting affect the amounts of revenue and related
expenses reported in our consolidated financial statements. A number of internal and external factors can affect our estimates, including labor rates, utilization and efficiency variances, specification and testing requirement changes, and
unforeseen changes in project scope.

Arthur Reidel, Chairman of our Board of Directors, is also a Venture
Partner of Lightspeed Venture Partners. Lightspeed Venture Partners is the venture group of The Weiss, Peck & Greer Entities, which in the aggregate hold 1,223,242 shares of common stock, representing approximately 6% of our outstanding shares
as of December 31, 2004.

The following tables and discussion sets forth, for the periods given, selected consolidated
financial data as a percentage of our revenue and the percentage of period-over-period change represented by the line items in our consolidated condensed statements of operations. The tables and the discussion below should be read in connection with
the condensed consolidated financial statements and the notes thereto which appear elsewhere in this report, as well as with our consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year
ended March 31, 2004. All percentage calculations set forth in this section have been made using figures presented in the condensed consolidated financial statements, and not from the rounded figures referred to in the text of this management
discussion and analysis.

Total revenues increased in the three months ended December 31, 2004 as compared to the same
period in fiscal 2004 due to an increase in both new and renewal software licenses revenues and software deployment services. Total revenues increased in the first nine months of fiscal 2005 as compared to the same period in fiscal 2004 due to an
increase in both new and renewal software license revenues, software deployment services, and strategic consulting services.

License and renewal revenues. For the three months ended December 31, 2004, desktop software products revenues increased to $1.6 million from $1.4 million in the
same period in fiscal 2004, primarily as a result of $0.2 million of desktop software product revenue recognized upon completion and acceptance of installation. For the nine months ended December 31, 2004, desktop software products revenues
increased to $4.5 million from $3.9 million in the same period in fiscal 2004, primarily as a result of an increase in our installed base and recognition of desktop software products revenue previously deferred.

PKS software products revenues increased to $1.8 million and $2.9 million for the three and
nine months ended December 31, 2004, respectively, from $530,000 and $1.6 million, compared to the same period in fiscal 2004, respectively. This increase was due to $1.1 million in recognition of PKS license revenue in the third quarter of fiscal
2005 due to completion and acceptance of installation. The completion of this core implementation, which began approximately one year ago, allowed us to recognize associated revenues that contributed significantly to our revenue and gross margin
growth during the third quarter of fiscal 2005. For the nine months ended December 31, 2004, the increase in revenue is also attributable to the installation and acceptance of several large PKS contracts.

DMX software revenues were $168,000 and $518,000 in the three and nine months ended December
31, 2004. DMX was introduced in the second quarter of fiscal 2004, and therefore did not contribute to revenues in the three and nine months ended December 30, 2003.

Services revenues. Software services revenues were $582,000 and $1.4 million for the three and nine months ended December 31, 2004,
compared to $385,000 and $761,000 in the same periods in fiscal 2004. The increase in software services revenue in the first nine months of fiscal 2005 was largely driven by services revenues associated with deployment services on our PKS products
due to timing of software implementation during the third quarter of fiscal 2005.

Strategic consulting services
revenues were $2.3 million and $7.3 million in the three and nine months ended December 31, 2004, compared to $2.3 million and $6.1 million in the same periods in fiscal 2004. The increase in strategic consulting services revenue in the first nine
months of fiscal 2005 compared to the same period in fiscal 2004 was driven by an increase in the average size of our consulting contracts as well as in increase in headcount.

Cost of revenues and operating expenses

The amounts discussed below for costs of license and renewal revenues, cost of services revenues, research and development, sales and
marketing, and general and administrative expenses exclude amortization of deferred stock-based compensation.

Total cost of revenues in absolute dollars decreased in the three and
nine months ended December 31, 2004 as compared to the same periods in fiscal 2004 due to increased efficiencies related to travel expenses, bonuses, and allocation of common costs related to facilities and overhead costs. The decrease as a
percentage of revenues in the three and nine months ended December 31, 2004 reflects the increase in mix of software license revenues as a percentage of total revenues, which carries a higher gross margin.

Cost of license and renewal revenues. Cost of license and renewal revenues consists of royalty expense for third-party software
included in our products, and cost of materials for both initial products and product updates provided for in our annual license agreements. Cost of license and renewal revenues was $103,000 and $295,000 for the three and nine months ended December
31, 2004, respectively, compared to $117,000 and $310,000 in the same periods in fiscal 2004. The decrease in cost of license and renewal revenues in the third quarter of fiscal 2005 in absolute dollars is due a one-time purchase of intellectual
property during the third quarter of fiscal 2004. Cost of license and renewal revenues as a percentage of revenues during the third quarter of fiscal 2005 has remained relatively consistent.

Cost of services revenues. Cost of service revenues consists of payroll and related
costs, travel expenses, and facilities and overhead costs associated with our deployment services group. Cost of services revenue was $453,000 and $1.1 million for the three and nine months ended December 31, 2004, respectively, compared to $592,000
and $1.3 million in the same periods in fiscal 2004. Cost of services revenue in the first nine months of fiscal 2005 decreased in absolute dollars primarily due to an increase in billable software deployment projects, which increased our deferred
cost of revenues. The reduction in cost of services revenues as a percentage of revenues was related to increased efficiencies in the software deployment organization in fiscal 2005. In the first half of fiscal 2004, the software deployment
organization had not yet become fully operational.

Cost of services for our strategic consulting segment consists of payroll and related costs, travel expenses, and facilities and overhead costs associated with our
strategic consulting personnel. Cost of services for our strategic consulting segment was $1.4 million and $4.2 million for the three and nine months ended December 31, 2004, compared to $1.4 million and $4.0 million in the same periods of fiscal
2004. The increase in cost of services for our strategic consulting segment in absolute dollars in the nine months ended December 31, 2004, was primarily attributable to increased headcount and payroll-related costs. The decrease as a percentage of
revenues in the three and nine months ended December 31, 2004, was related to increased efficiencies in our strategic consulting organization.

The increase in research and development expenses in absolute dollars for the three and
nine months ended December 31, 2004, as compared to the same periods in fiscal 2004 was primarily related to an increase headcount of research and development personnel. The decrease as a percentage of total revenues for the three and nine months
ended December 31, 2004 is primarily due to an increase in software products revenue.

The strategic consulting group does not
engage in research and development activities, nor is any such expense allocable to the segment, therefore it does not incur research and development related expenses.

Sales and marketing expenses in the three and nine months ended December 31, 2004 increased in absolute dollars from the same periods in
fiscal 2004 due to an increase in salaries, offset by a reduction in commissions and facilities-related expenses. Sales and marketing expenses as a percentage of revenues for the three and nine months ended December 31, 2004 decreased as a result of
our ongoing cost containment efforts while revenues have increased. The software products and strategic consulting segments both have dedicated sales and marketing resources, as well as a shared pool of sales and marketing resources which are
allocated to the segments based on each segments revenue as a relative percentage of total revenues. Inter-segment sales costs related to the shared pool of resources are estimated by management and used to compensate or charge each segment
for such shared costs, and to incentivize shared efforts. Management will continually evaluate the alignment of sales and inter-segment commissions for segment reporting purposes, which may result in changes to segment allocations in future periods.

The increase in sales and marketing expense in absolute dollars in the three and nine months
ended December 31, 2004, as compared to the same periods in fiscal 2004 was primarily the result of increased software sales headcount and related payroll costs, and increased marketing activity, partially offset by a reduction in facilities-related
costs. The decrease in sales and marketing expenses as a percentage of revenue for the three and nine months ended December 31, 2004, as compared to the same periods in fiscal 2004, was related to an increase in software product revenue. The
increase in sales and marketing expense as a percentage of revenue for the three months ended December 31, 2004 is due to an increase in allocation of expenses as software products contributed to relatively larger percentage of revenue.

The decrease in sales and marketing expense in absolute dollars and as a percentage of revenues in the three and nine months ended December
31, 2004, as compared to the same periods in fiscal 2004, was primarily the result of a decrease in allocation of expenses as strategic consulting contributed to a relatively smaller percentage of revenue, and to a lesser degree, commissions and
travel expense.

General and administrative expenses in absolute dollars increased
during the three and nine months ended December 31, 2004, as compared to the same periods in fiscal 2004, as a result of increased professional service fees and payroll related expense, but decreased as a percentage of revenues compared to the same
periods in fiscal 2004 as a result of our ongoing cost containment efforts compared to revenue growth. General and administrative expenses not specifically associated with corporate initiatives are allocated based on each segments revenues as
a relative percentage of total revenues. In the three and nine months ended December 31, 2004, $94,000 and $94,000, respectively, of general and administrative expenses were associated with corporate initiatives and not allocated to the segments,
compared to $16,000 and $71,000 in the same periods in fiscal 2004.

The increase in general and administrative expense in absolute dollars in the three and nine months ended December 31, 2004 was primarily the result of an increase in the
allocation of general and administrative costs to the software products segment as the result of a higher relative percentage of software products revenues to total revenues. The decrease in general and administrative expenses as a percentage of
revenue for the nine months ended December 31, 2004 was related to ongoing cost containment efforts while revenues have increased.

The decrease in general and administrative expense in absolute dollars in the three and nine months ended December 31, 2004 was primarily the result of an decrease in the allocation of general and administrative
expenses to the strategic consulting segment, as the strategic consulting segment contributed a relatively smaller percentage of total revenues. The decrease in general and administrative expense as a percentage of revenue for the three and nine
months ended December 31, 2004 was related to ongoing cost containment efforts while revenues have increased.

The deferred stock compensation expenses recorded in each fiscal 2004 period represent the relative amortization of the difference between the exercise price of certain stock options granted prior to our initial
public offering in August 2000 and the then deemed fair value of our common stock, recognized using the graded method over the vesting period of the stock options. As of March 31, 2004, all deferred stock compensation was fully amortized, therefore,
there was no amortization of deferred stock compensation in fiscal 2005.

Year over year comparison for the
three and nine months ended December 31, 2004 (in thousands):

Three Months EndedDecember 31,

Nine Months EndedDecember 31,

2004

2003

2004

2003

Provision for income taxes

$

46

$

14

$

68

$

69

Provisions for income taxes were
recorded for the three and nine months ended December 31, 2004 and 2003. These provisions were attributable to federal and state alternative minimum taxes, other state taxes and foreign income tax. The amounts provided were at rates less than the
combined U.S. federal and state statutory rates due to the recognition of federal and state net operating loss carry forwards.

Liquidity and Sources of Capital

From our inception through the initial public offering of our common stock, we funded operations through the private sale of preferred stock, with net proceeds of
approximately $38 million, limited borrowings and equipment leases. In August 2000, we completed our initial public offering of 3,000,000 shares of common stock, at a price of $10.00 per share, all of which were issued and sold by us for net
proceeds of $26.4 million, net of underwriting discounts and commissions of $2.1 million and expenses of $1.5 million. We paid $6.1 million to holders of our Series C preferred stock at the closing of the offering as required by the terms of the
Series C preferred stock. After this payment, our net proceeds were $20.3 million. In June and September of fiscal 2003, we completed a private placement of preferred stock to several of our investors, raising additional net proceeds of $7.2
million.

Summarized cash, working capital and cash flow information is as follows (dollars in thousands):

December 31,

2004

% Change

March 31,

2004

Cash and cash equivalents

$

8,766

(13

)%

$

10,027

Working capital

$

2,551

23

%

$

2,082

Nine Months Ended

December 31,

2004

% Change

2003

Cash provided by (used in) in operating activities

$

140

116

%

$

(857

)

Cash used in investing activities

$

(340

)

(81

)%

$

(188

)

Cash used in financing activities

$

(1,039

)

24

%

$

(1,369

)

Cash and Cash Equivalents. As
of December 31, 2004, our cash and cash equivalents consisted primarily of demand deposits and money market funds. The decrease in our cash and cash equivalents in the nine months ended December 31, 2004 was primarily due to $1.0 million of cash
used in financing activities related to the pay down of notes payable and cash payment for dividends and $340,000 used in investing activities for property and equipment. The largest use of cash from operating activities was an increase in accounts
receivable, due to the timing of billings and cash collections, and a decrease in deferred revenue. Our working capital, defined as current assets less current liabilities, increased primarily due to an increase in accounts receivable related to
increased sales activity in December 2005, partially offset by an increase in accrued expenses, due to timing of payments, and payments of dividends to our preferred stockholders.

Cash Flows Used in Operating Activities. Cash flows provided by operating activities increased in the first nine months of fiscal
2005 as compared to the same period of fiscal 2004 primarily due to the net income in the first nine months of fiscal 2005 compared to the net loss in the first nine months of fiscal 2004. In addition, deferred product revenue decreased by $1.1
million as we recognized deferred software and license revenue, which was partially offset by an increase of $646,000 in deferred services revenue.

Cash Flows Used in Investing Activities. Cash flows used in investing activities in the first nine months of fiscal 2005 relate to the investment in a new
financial system that we will begin implementing during the fourth quarter of fiscal 2005. Cash flows used in investing activities in the first nine months of fiscal 2004 relate to the purchases of capital equipment necessary for our ongoing
operations.

Cash Flows Used in Financing Activities. Cash flows used in
financing activities during the first nine months of fiscal 2005 and fiscal 2004 were primarily a result of payments against our outstanding loan facilities with Silicon Valley Bank and payments of dividends to our preferred stockholders.

Credit Facilities. In May 2004, we renegotiated, extended and expanded
our accounts receivable credit facilities with Silicon Valley Bank for an additional year, providing for up to $3.0 million in borrowings, secured against 80% of eligible domestic accounts receivable. At December 31, 2004, $1.0 million of the
accounts receivable facility had been utilized and a remaining secured term loan balance of $1.3 million was outstanding. Interest is accrued at 0.5% above prime and is payable monthly from the date of borrowing. Certain of our assets, excluding
intellectual property, secure both the accounts receivable and term loan facilities. The revolving credit facility expires in May 2005. The following financial covenants apply to the extended Silicon Valley Bank credit facilities: net loss no
greater than $500,000 in the first quarter of fiscal 2005, net income of at least $1.00 in the remaining three quarters of fiscal 2005; minimum modified quick ratio (defined as cash and cash equivalents plus accounts receivable, divided by total
current liabilities, including all bank debt and not including deferred revenue) of 1.5:1 for the months of April 2004 through July 2004, 1.75:1 for the months of August 2004 through November 2004, and 2:1 for the months of December 2004 and each
month thereafter. We were in compliance with each of these covenants at December 31, 2004.

Preferred Stock Financing. On June 26, 2002 and September 11, 2002, we completed private placements of our securities to certain entities affiliated with Alloy Ventures, Inc. and the Sprout Group, both of which
were among our existing stockholders, pursuant to a Preferred Stock and Warrant Purchase Agreement (the Purchase Agreement). Pursuant to the Purchase Agreement, we sold an aggregate of 1,814,662 units (each a Unit, and
collectively the Units). Each Unit consisted of one share of our Series A redeemable convertible preferred stock (the Series A Preferred) and a warrant to purchase one share of our common stock. The purchase price for each
Unit was $4.133, which is the sum of $4.008 (four times the underlying average closing price for our common stock over the five trading days prior to the initial closing (i.e., $1.002)) and $0.125 for each share of Series A Preferred and warrant,
respectively.

The Series A Preferred is redeemable at any time after five
years from the date of issuance upon the affirmative vote of at least 75% of the holders of Series A Preferred, at a price of $4.008 per share plus any unpaid dividends. Each share of Series A Preferred is convertible into four shares of our common
stock at the election of the holder or upon the occurrence of certain other events. The

holders of Series A Preferred are entitled to receive, but only out of legally available funds, quarterly cumulative dividends at the rate of 8% per year
commencing in September 2002, which are payable in cash or shares of Series B redeemable convertible preferred stock (the Series B Preferred and, together with the Series A Preferred, the Preferred Stock), at the election of
the holder.

The terms of the Series B Preferred are identical to the Series A
Preferred, except that the Series B Preferred is not entitled to receive the 8% dividends. In the event of any liquidation or winding up of the company, the holders of the Series A Preferred and Series B Preferred shall be entitled to receive in
preference to the holders of the common stock a per share amount equal to the greater of (a) the original issue price, plus any accrued but unpaid dividends and (b) the amount that such shares would receive if converted to common stock immediately
prior thereto (the Liquidation Preference). After the payment of the Liquidation Preference to the holders of Preferred Stock, the remaining assets shall be distributed ratably to the holders of the common stock. A merger, acquisition,
sale of voting control of the company in which our stockholders do not own a majority of the outstanding shares of the surviving corporation, or a sale of all or substantially all of our assets, shall be deemed to be a liquidation. The warrants are
exercisable for a period of five years from issuance with an exercise price of $1.15 per share.

The quarterly dividends for the Series A Preferred Stock commenced in September 2002. On June 1, 2004 (the Valuation Date), at the election of the Series A Preferred stockholders, we issued a dividend in
the form of 18,142 shares of Series B Preferred Stock to our Series A Preferred stockholders. During the three months ended December 31, 2004, we also paid $145,000 in cash dividends to the Series A Preferred stockholders and we recorded an
additional $48,000 in accrued dividends payable as of December 31, 2004.

Contractual Commitments. As of December 31, 2004, we have operating leases for our facilities and certain property and equipment that expire at various times through fiscal years 2005 and 2006. These arrangements allow us to obtain
the use of the equipment and facilities without purchasing them. If we were to acquire these assets, we would be required to obtain financing and record a liability related to the financing of these assets. Leasing these assets under operating
leases allows us to use these assets for our business while minimizing the obligations and up front cash flow related to purchasing the assets. During the three and nine months ended December 31, 2004, we recorded rent expenses related to these
arrangements of $151,000 and $451,000, respectively.

The following is a
summary of our contractual cash commitments associated with our debt and lease obligations as of December 31, 2004 (in thousands):

Payments Due by Period

Contractual Obligations

Total

Less Than 1

Year

1-3 Years

Redeemable convertible preferred stock (1)

$

1,455

$

582

$

873

Notes payable

2,313

1,875

438

Operating leases (gross)

420

420



Total commitments

$

4,188

$

2,877

$

1,311

(1)

The holders of the preferred stock may elect to have us redeem the preferred stock immediately after it becomes redeemable in June 2007. However, if this does not occur, we will
continue to pay dividends in the amount of approximately $582,000 per year. Further, the terms of the preferred stock provide that it will automatically convert to common stock in the event of a public offering meeting certain minimum conditions,
and if this were to occur our obligation to pay dividends or redeem the preferred stock would cease at that time. Any of these outcomes is beyond our control and the probability of any of these outcomes occurring is uncertain. The amounts presented
in the table above reflect only our contractual obligations related to dividend payments to the holders of the preferred stock up to June 2007, at which point the stock may or may not be redeemed.

Short Term and Long Term Liquidity. We believe that the combination of our cash and
cash equivalents and currently anticipated cash flow from operations should be adequate to sustain operations through the next 12 months. We are managing our business to achieve positive cash flows utilizing existing assets. We have substantial
commitments as a result of the sale of shares of redeemable, convertible preferred stock, and we also extended our credit facilities under our arrangements with Silicon Valley Bank. During fiscal 2004, we reduced ongoing operating expenses by
reducing purchases of other goods and services and by making workforce reductions, and although we generated positive operating cash flow for fiscal 2004 and for the nine months ended December 31, 2004, there is no assurance that we can continue to
do so. We are committed to the successful execution of our operating plan and we will take continued actions as necessary to ensure our cash resources are sufficient to fund our working capital requirements at least through the next twelve months.

Our long-term liquidity and capital requirements will depend on numerous
factors including our future revenues and expenses, growth or contraction of operations and general economic pressures. We may not be able to maintain our current market share, or continue to expand our business, without investing in our operations,
technology, or product and service offerings. In order to do so, we may need to raise additional funds through public or private financings or other sources to fund our operations. However, our common stock is not listed on an exchange or the Nasdaq
National Market, and until it is listed it will be difficult for us to make sales of our equity stock. In addition, the terms of our preferred stock may prevent us from issuing additional shares of preferred stock on terms that investors would
require in order to invest in our preferred stock. The necessity of raising additional funds could require us to incur

debt on terms that could restrict our ability to make capital expenditures and incur additional indebtedness. As a result, we may not be able to obtain
additional funds on commercially reasonable terms, or at all. In addition, beginning in June 2007, the holders of our preferred stock can force us to redeem the shares of our preferred stock, and if we were required to redeem all of the shares of
preferred stock currently outstanding, this would entail a cash outlay of approximately $7.5 million.

On
December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards No. 123R, Share-Based Payment, or SFAS 123R, which is a revision of Statement of Accounting Standards No. 123,
Accounting for Stock-Based Compensation. SFAS 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends Statement of Accounting Standards No. 95, Statement of Cash Flows. SFAS 123R
requires all companies to measure compensation expense for all share-based payments (including employee stock options and options issued pursuant to employee stock purchase plans) based upon the fair value of the stock-based awards at the date of
grant. SFAS 123R is effective for all public companies for interim or annual periods beginning after June 15, 2005. Retroactive application of the requirements of FASB Statement No. 123 to the beginning of the fiscal year that includes the effective
date would be permitted, but not required. Early adoption of Statement 123R is encouraged. The impact of adoption of Statement 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future.

We operate in a rapidly changing economic and technological environment that presents
numerous risks. Many of these risks are beyond our control and are driven by factors that we cannot predict. The following discussion, in addition to the other information contained in this Quarterly Report on Form 10-Q, identifies risks and
uncertainties that may have a material adverse effect on our business, financial condition or results of operations. You should carefully consider the risks and uncertainties described below and the other information in this report before deciding
whether to invest in shares of our common stock. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also impair our business operations. Our business
could be harmed by any of these risks. This could cause the trading price of our common stock to decline, and you may lose part or all of your investment. This section should be read in conjunction with our consolidated financial statements and
notes thereto, and Managements Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q.

We commenced our operations in April 1995 and have incurred net
losses for every fiscal year since that time. We achieved profitability in the fourth quarter of fiscal 2004 and have maintained profitability through the third quarter of fiscal 2005. As of December 31, 2004, we had an accumulated deficit of $77.8
million. We may incur further losses as we continue to develop our business. Our ability to sustain profitability is based on a number of assumptions, including some outside of our control, including the state of the overall economy and the demand
for our products, and if these assumptions do not prove to be accurate then we may not be able to generate sufficient revenues to sustain profitability. Furthermore, even if we do sustain profitability and positive operating cash flow, we may not be
able to increase profitability or positive operating cash flow on a quarterly or annual basis. If our profitability does not meet the expectations of investors, the price of our common stock may decline.

We believe we have adequate cash to sustain operations through the next 12 months, and we are managing our business to achieve positive cash flows utilizing existing assets. However, even if we sustain profitability,
we may not be able to generate sufficient profits to grow our business. As a result, we may need to raise additional funds through public or private financings or other sources to fund our operations. We may not be able to obtain additional funds on
commercially reasonable terms, or at all. Failure to raise capital when needed could harm our business. If we raise additional funds through the issuance of equity securities, these equity securities might have rights, preferences or privileges
senior to our common stock and preferred stock. In addition, the necessity of raising additional funds could force us to incur debt on terms that could restrict our ability to make capital expenditures and incur additional indebtedness.

The terms governing our
credit facilities with Silicon Valley Bank include a number of significant restrictive covenants. These covenants could adversely affect us by limiting our ability to plan for or react to market conditions, meet our capital needs and execute our
business strategy. These covenants will, among other things, limit our ability to:

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incur additional debt;



make certain investments;



create liens; or



sell certain assets.

These covenants may significantly limit our operating and financial flexibility and limit our ability to respond to changes in our business or competitive activities. Our failure to comply with these covenants could
result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their scheduled due date. In addition, Silicon Valley Bank could foreclose on our assets.

Our ability to realize operating efficiencies through restructuring or other actions.

As a result, quarterly comparisons may not indicate reliable trends of future performance.

We manage our expense levels in part based upon our expectations concerning future revenue,
and these expense levels are relatively fixed in the short term. If we have lower revenue than expected, we may not be able to reduce our spending in the short term in response. Any shortfall in revenue would have a direct impact on our results of
operations.

These factors and other specific accounting requirements for software revenue recognition require that we have very precise terms in our license agreements to allow us to
recognize revenue when we initially deliver software or perform services. Although we have a standard form of license agreement that we believe meets the criteria for current revenue recognition on delivered elements, we negotiate and revise these
terms and conditions in some transactions. Therefore, it is possible that from time to time we may license our software or provide service with terms and conditions that do not permit revenue recognition at the time of delivery or even as work on
the project is completed. In the three and nine months ended December 31, 2004 and for fiscal 2004, software license revenue accounted for 55%, 48%, and 46% of our total revenues, respectively. The majority of our large PKS software transactions
include services pertaining to modification and customization of the core PKS software product, which may result in delayed revenue recognition for a significant period of time.

We realize lower margins on
services than on license revenues. In addition, we may contract with certain third parties to supplement the services we provide to customers, which generally yields lower gross margins than our service business. As a result, if service

revenue increases as a percentage of total revenue or if we increase our use of third parties to provide such services, our gross margins would be lower and
our operating results may be affected. In the last three fiscal years, although services revenue has increased in absolute dollars, it has decreased as a percentage of total revenues from 65% in fiscal 2002 to 56% in fiscal 2003 and 54% in fiscal
2004. During the same time period, on an annual basis, services costs as a percentage of services revenues have increased from 68% in fiscal 2002 to 73% fiscal 2004, yet our overall gross margin has increased from 42% in fiscal 2002 to 56% in fiscal
2004, as an increasing percentage of our total revenues is attributable to software revenue.

The lengths of our sales and implementation cycles are difficult to predict and depend on a
number of factors, including the type of product or services being provided, the nature and size of the potential customer and the extent of the commitment being made by the potential customer. Our sales cycle is unpredictable and may take six
months or more. Our implementation cycle is also difficult to predict and can be longer than one year. Each of these can result in delayed revenues, increased selling expenses and difficulty in matching revenues with expenses, which may contribute
to fluctuations in our results of operations. A key element of our strategy is to market our product and service offerings to large organizations. These organizations can have particularly lengthy decision-making processes and may require evaluation
periods, which could extend the sales and implementation cycle. Moreover, we often must provide a significant level of education to our prospective customers regarding the use and benefit of our product and service offerings, which may cause
additional delays during the evaluation and acceptance process. We therefore have difficulty forecasting the timing and recognition of revenues from sales of our product and service offerings.

We receive a substantial
majority of our revenue from a limited number of customers. One customer accounted for 34% and 15% of total revenues for the three months ended December 31, 2004 and 2003, respectively. Another customer accounted for 17% and 13% of total revenues
for the three months ended December 31, 2004 and 2003, respectively. For the three and nine months ended December 31, 2004, sales to our top two customers accounted for 51% and 47% of total revenue, respectively, and sales to our top five customers
in the same periods accounted for 72% and 63% of total revenue, respectively. For the three and nine months ended December 31, 2003, sales to our top two customers accounted for 28% and 26% of total revenue, respectively, and sales to our top five
customers in the same periods accounted for 54% and 48% of total revenue, respectively. For fiscal 2004, 2003 and 2002, sales to our top two customers accounted for 28%, 28% and 29% of total revenue, respectively, and sales to our top five customers
in the same periods accounted for 50%, 50% and 49% of total revenue, respectively. We expect that a significant portion of our revenue will continue to depend on sales to a small number of customers. If we do not generate as much revenue from these
major customers as we expect to, or if revenue from such customers is delayed, or if we lose any of them as customers, our total revenue may be significantly reduced.

The markets in which we compete can put pressure on us to reduce our prices. If our
competitors offer deep discounts on certain products in an effort to recapture or gain market share, we may then need to lower prices or offer other favorable terms in order to compete successfully. Any such changes would be likely to reduce margins
and could adversely affect operating results. We have periodically changed our pricing model and any broadly based changes to our prices and pricing policies could cause service and license revenues to decline or be delayed as our sales force
implements and our customers adjust to the new pricing policies. If we do not adapt our pricing models to reflect changes in customer use of our products, our revenues could decrease.

Our success depends on our ability to develop our existing customer relationships and establish relationships with additional pharmaceutical and biotechnology companies. If we lose any significant relationships with existing customers or
fail to establish additional relationships, we may not be able to execute our business plan and our business will suffer. Developing customer relationships with pharmaceutical companies can be difficult for a number of reasons. These companies are
often very large organizations with complex decision-making processes that are difficult to affect. In addition, because our products and services relate to the core technologies of these companies, these organizations are generally cautious about
working with outside companies. Some potential customers may also resist working with us until our products and services have achieved more widespread market acceptance. Our existing customers could also reassess their commitment to us, not renew
existing agreements or choose not to expand the scope of their relationship with us.

Many of our services agreements can be
canceled upon prior notice by our customers. Additionally, due to the nature of our services and deployment engagements, customers sometimes delay projects because of timing of the clinical trials and the need for data and information that prevent
us from proceeding with our projects. These delays and contract cancellations cannot be predicted with accuracy and we cannot assure you that we will be able to replace any delayed or canceled contracts with the customer or other customers. If we
are unable to replace those contracts, our revenues and results of operations would be adversely affected.

The successful growth of our business depends on our ability to develop new products and
services and incorporate new capabilities, including the expansion of our product and services offerings to address a broader set of customer needs related to clinical development of drugs and thereby expand the number of our prospective users, on a
timely basis. If we cannot adapt to changing technologies, emerging and evolving industry standards, new scientific developments and increasingly sophisticated customer needs, we may not achieve revenue growth and our products and services may
become obsolete, and our business could suffer. We have suffered product delays in the past, resulting in lost product revenues. In addition, early releases of software often contain errors or defects. We cannot assure you that, despite our
extensive testing, errors will not be found in our products before or after commercial release, which could result in product redevelopment costs and loss of, or delay in, market acceptance. Furthermore, a failure by us to introduce new products or
services on schedule could harm our business prospects. Any delay or problems in the installation or implementation of new products or services may cause customers to forego purchases from us. We may need to accelerate product introductions and
shorten product life cycles, which will require high levels of expenditures of research and development that could adversely affect our operating results. A failure by us to introduce new services on a timely and cost-effective basis to meet
evolving customer requirements, or to integrate new services with existing services, could harm our business prospects.

As part of implementing our products and services, we inherently gain
access to certain highly confidential proprietary customer information. It is critical that our facilities and infrastructure remain secure and are perceived by the marketplace to be secure. Despite our implementation of a number of security
measures, our infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. We do not have insurance to cover us for losses incurred in many of these events. If
we fail to meet our customers security expectations, we could be liable for damages and our reputation could suffer.

Because our projects
may contain scientific risks, which are difficult to foresee, we cannot guarantee that we will always be able to complete them. Any failure to meet our customers expectations could harm our reputation and ability to generate new business. On a
few occasions, we have encountered scientific limitations and been unable to complete a project. In each of these cases, we have been able to successfully renegotiate the terms of the project with the particular customer. We cannot assure you that
we will be able to renegotiate our customer agreements if such circumstances occur in the future. Moreover, even if we complete a project, we may not meet our customers expectations regarding the quality of our products and services or the
timeliness of our services.

We believe that
our future success depends upon our ability to continue to train, retain, effectively manage and attract highly skilled technical, scientific, managerial, sales and marketing personnel. We currently have limited personnel and other resources to
staff and complete consulting and software deployment projects. In addition, as we grow our business, we expect an increase in the number of complex projects and large deployments of our products and services, which require a significant amount of
personnel for extended periods of time. In particular, there is a limited supply of modeling and simulation personnel worldwide, and competition for these personnel from numerous companies and academic institutions may limit our ability to hire
these persons. From time to time, we experience difficulties in locating enough highly qualified candidates in desired geographic locations, or with required scientific or industry-specific expertise. Staffing projects and deploying our products and
services will become more difficult as our operations and customers become more geographically diverse. If we are not able to adequately staff and complete our projects, we may lose customers and our reputation may be harmed. Any difficulties we may
have in completing customer projects may impair our ability to grow our business.

We are highly
dependent on the principal members of our management, scientific and development staff. Our reputation is also based in part on our association with key scientific advisors. The loss of any of these personnel might adversely affect our reputation in
the market and harm our business. Failure to attract and retain key management, scientific and technical personnel could prevent us from achieving our strategy and developing our products and services. In addition, our management team has
experienced significant personnel changes over the past years and may continue to experience changes in the future. If our management team continues to experience attrition, high turnover, or does not work effectively together, it could harm our
business. Additionally, we do not currently hold key-man life insurance policies on our CEO, CFO or other key contributors. The demise of any of these individuals could adversely affect our business.

Our
intellectual property is important to our competitive position. We protect our proprietary information and technology through a combination of patent, trademark, trade secret and copyright law, confidentiality agreements and technical measures. We
have filed nine patent applications, of which two patents have issued. We cannot assure you that the steps we have taken will prevent misappropriation of our proprietary information and technology, nor can we guarantee that we will be successful in
obtaining any patents or that the rights granted under such patents will provide a competitive advantage. Misappropriation of our intellectual property could harm our competitive position. We may also need to engage in litigation in the future to
enforce or protect our intellectual property rights or to defend against claims of invalidity, and we may incur substantial costs as a result. In addition, the laws of some foreign countries provide less protection of intellectual property rights
than the laws of the United States and Europe. As a result, we may have an increasingly difficult time adequately protecting our intellectual property rights as our sales in foreign countries grow.

We cannot assure you that infringement claims by third parties will not be asserted against us or, if asserted, will be unsuccessful. These claims, whether or not meritorious, could be expensive and divert management
resources from operating our company. Furthermore, a party making a claim against us could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could block our ability to provide products or services,
unless we obtain a license to such technology. In addition, we cannot assure you that licenses for any intellectual property of third parties that might be required for our products or services will be available on commercially reasonable terms, or
at all.

We market and sell our products and services in the United States and internationally. International sales of our products and services as a percentage of our total revenues for the three and nine months ended
December 31, 2004 and for fiscal 2004, 2003, and 2002 were approximately 16%, 21%, 29%, 23% and 36%, respectively. We have a total of 9 employees based outside the United States who deploy our software, perform consulting services and perform
research in Europe and Australia. We cannot be certain that we have fully complied with all rules and regulations in every applicable jurisdiction outside of the United States with respect to our current and previous operations outside of the United
States. The failure to comply with such rules and regulations could result in penalties, monetary or otherwise, against us. Our existing marketing efforts into international markets may require significant management attention and financial
resources. We cannot be certain that our existing international operations will produce desired levels of revenue. We currently have limited experience in developing localized versions of our products and services and marketing and distributing our
products internationally. Our international operations also expose us to the following general risks associated with international operations:



Disruptions to commercial activities or damage to our facilities as a result of political unrest, war, terrorism, labor strikes and work stoppages;

Governmental agencies throughout the world, but
particularly in the United States, highly regulate the drug development and approval process. A large part of our software and services business involves helping pharmaceutical and biotechnology companies through the regulatory drug approval
process. Any relaxation in regulatory approval standards could eliminate or substantially reduce the need for our services, and, as a result, our business, results of operations and financial condition could be materially adversely affected.
Potential regulatory changes under consideration in the United States and elsewhere include mandatory substitution of generic drugs for patented drugs, relaxation in the scope of regulatory requirements or the introduction of simplified drug
approval procedures. These and other changes in regulation could have an impact on the business opportunities available to us.

While we believe we currently have adequate internal control over financial reporting, we are required to evaluate our internal control under Section 404 of the
Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report
on Form 10-K for the fiscal year ending March 31, 2006, we will be required to furnish a report by our management on our internal control over financial reporting. Such report will contain, among other matters, an assessment of the effectiveness of
our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses
in our internal control over financial reporting identified by management. Such report must also contain a statement that our auditors have issued an attestation report on managements assessment of such internal controls. PCAOB Auditing
Standard No. 2 provides the professional standards and related performance guidance for auditors to attest to, and report on, managements assessment of the effectiveness of internal control over financial reporting under Section 404.

While we currently believe our internal control over financial reporting is
effective, we are in the process of system and process documentation and evaluation needed to comply with Section 404, which is both costly and challenging. During this process, if our management identifies one or more material weaknesses in our
internal control over financial reporting, and those weaknesses are not appropriately remediated prior to March 31, 2006, we will be unable to assert such internal control is effective. If we are unable to assert that our internal control over
financial reporting is effective as of March 31, 2006 (or if our auditors are unable to attest that our managements report is fairly stated or they are unable to express an opinion on our managements evaluation or on the effectiveness of
the internal control), we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price, and our business and operating results could be harmed.

While we currently anticipate being able to satisfy the requirements of Section 404 in a
timely fashion, we cannot be certain as to the timing of completion of our evaluation, testing and any required remediation due in large part to the fact that there is no precedent available by which to measure compliance with the new Auditing
Standard No. 2. If we are not able to comply with the requirements of Section 404 in a timely manner or if our auditors are not able to complete the procedures required by Audit Standard No. 2 to support their attestation report, we would likely
lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price, and our business and operating results could be harmed.

Because our products and services are new and still evolving, there is significant uncertainty and risk as to the demand for, and market acceptance of, these products and services. As a result, we are not able to
predict the size and growth rate of our market with any certainty. In addition, other companies, including potential strategic partners, may enter our market. Our existing customers may also elect to terminate our services and internally develop
products and services similar to ours. If our market fails to develop, grows more slowly than expected, or becomes saturated with competitors, our business prospects will be impaired.

The pharmaceutical
industry is regulated by a number of federal, state, local and international governmental entities. Although our products and services are not directly regulated by the United States Food and Drug Administration or comparable international agencies,
the use of some of our analytical software products by our customers may be regulated. We currently provide assistance to our customers in achieving compliance with these regulations. The regulatory agencies could enact new regulations or amend
existing regulations with regard to these or other products that could restrict the use of our products or the business of our customers, which could harm our business.

In recent years, the worldwide pharmaceutical industry has undergone substantial consolidation. If any of our customers consolidate with another business, they may delay or cancel projects, lay off personnel or reduce
spending, any of which could cause our revenues to decrease. In addition, our ability to complete sales or implementation cycles may be impaired as these organizations undergo internal restructuring.

Our customers include researchers at pharmaceutical
and biotechnology companies, academic institutions and government and private laboratories. Fluctuations in the IT and research and development budgets of these researchers and their organizations could have a significant effect on the demand for
our products. Research and development and IT budgets fluctuate due to changes in available resources, spending priorities, internal budgetary policies and the availability of grants from government agencies. Our business could be harmed by any
significant decrease in research and development or IT expenditures by pharmaceutical and biotechnology companies, academic institutions or government and private laboratories.

Recent or continued withdrawals of drugs from the public market could affect pharmaceutical spending, reduce the demand for our
products and have a negative impact on our revenues.

Recently, the
pharmaceutical industry has experienced, and may continue to experience, forced withdrawal of certain drugs from the public market due to safety risks. Recent or future drug withdrawals could affect our ability to market and sell our products and
services to companies faced with withdrawals. For example, withdrawals of drugs from the public market by our customers or potential customers may result in the reduction of current levels of spending on software solutions and strategic consulting
services by these companies to minimize the impact of a potential decline in revenues. In addition, we may provide products or services to customers with drugs in the same class as the drugs withdrawn from the market. If the demand for drugs within
the class of drugs faced with recent withdrawals decreases, we may experience a decrease in demand for our products or services in that class of drugs. A decrease in demand for our products, or a decrease in IT or research and development spending
by pharmaceutical companies, could prevent us from increasing or sustaining our software and strategic consulting revenues and adversely affect our revenues and results of operations.

On November 8, 2002 our stock was removed from trading on the
Nasdaq National Market as a result of failure to meet the continuing listing requirements, and our common stock is now quoted on the Over-the-Counter Bulletin Board system. Our common stock does not experience large trading volumes. In addition, our
delisting from the Nasdaq National Market has caused the loss of our exemption from the provisions of Section 2115 of the California Corporations Code that imposes particular aspects of California corporate law on certain non-California corporations
operating within California. As a result, (i) our Board of Directors is no longer classified and our stockholders elect all of our directors at each annual meeting, (ii) our stockholders are entitled to cumulative voting, and (iii) we are subject to
more stringent stockholder approval requirements and more stockholder-favorable dissenters rights in connection with certain strategic transactions. Some of these changes may affect any possible transaction involving a change of control of
Pharsight, which could negatively affect your investment. Other consequences include a reduction in analyst coverage, a lower share price as a result of lower trading volumes, and the loss of certain state securities law exemptions available to us
while our securities were traded on the Nasdaq National Market, which may affect our ability to provide for future issuances of our securities, among other consequences.

The market price of our common stock has
been lower than the required minimum bid price for relistment on Nasdaq, and the reduced trading volumes that we currently experience may prevent our stock from reaching the required minimum bid price for Nasdaq relistment. Additionally, our current
stockholders equity balance and our history of net losses may make it difficult for us to relist on Nasdaq at any point in the near future, if at all. We may be required to restructure our capital or debt structure, including our redeemable
convertible preferred stock, in order to relist on Nasdaq. There is no guarantee that we would be able to effect such restructuring under terms as favorable as our current equity and debt, if at all.

The market price of our common stock has been, and we expect it to continue to be, highly
volatile and to fluctuate significantly in response to various factors, including:

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Actual or anticipated variations in our quarterly operating results or those of our competitors;



Announcements of technological innovations or new services or products by us or our competitors;

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Timeliness of our introductions of new products;

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Changes in financial estimates by securities analysts;

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Changes in management; and



Changes in the conditions and trends in the pharmaceutical market.

For instance, since the beginning of fiscal 2004, the price of our common stock closed as low as $0.06 and as high as $2.50 per share. We have experienced very low
trading volume in our stock, and thus small purchases and sales can have a significant effect on our stock price. In addition, the stock markets have experienced extreme price and volume fluctuations, particularly in the past year, that have
affected the market prices of equity securities of many technology companies. These fluctuations have often been unrelated or disproportionate to operating performance. These broad market factors may materially affect the trading price of our common
stock. General economic, political and market conditions, such as recessions and interest rate fluctuations, may also have an adverse effect on the market price of our common stock.

As of November 1, 2004, entities affiliated with two of our directors beneficially own or
control a majority of the outstanding common stock, calculated on an as-if-converted basis. If these parties choose to act or vote together, they will have the power to control all matters requiring the approval of our stockholders, including the
election of directors and the approval of significant corporate transactions. This ability may have the effect of delaying or otherwise influencing a possible change in control transaction, which may or may not be favored by our other stockholders.
In addition, without the consent of these parties, we would likely be prevented from entering into transactions that could result in our stockholders receiving a premium for their stock.

Our preferred stockholders have elected in
the past, and may continue to elect, to receive their quarterly dividend payments in the form of Series B Preferred shares instead of cash. We record the value of these dividend payments in the form of shares at fair market value as of the dividend
payment date on our statement of operations. The fair market value is defined as the amount at which the capital stock would change hands between a willing buyer and a willing seller, each having reasonable knowledge of all relevant facts, neither
being under any compulsion to act, with equity to both. Because there is no market for such Series B Preferred shares, we perform a valuation of the fair market value of these shares. This valuation is affected by numerous factors, including but not
limited to our operations, financial conditions, future prospects and projected operations and performance of the company, as well as historical market prices and trading volume for our publicly traded securities. As such, the valuation of these
dividend payments may fluctuate widely, may be greater or lesser than the stated value of the Series B Preferred shares, and may affect our ability to sustain or increase our profitability. We are unable to project with any accuracy the impact of
fair market value of the Series B Preferred shares on our statement of operations.

Subject to the limitations described
below, our management, with the participation of our Chief Executive Officer, Shawn OConnor, and our Chief Financial Officer, Cynthia Stephens, evaluated the effectiveness of Pharsights disclosure controls and procedures as of the end of
the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report have been designed and are
functioning effectively to provide reasonable assurance that the information required to be disclosed by Pharsight in reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms.

There was no change in our
internal control over financial reporting during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We are making enhancements to our systems
and processes for customer purchase order entry and fulfillment of customer order processing.

We are in the process of reviewing and analyzing our system of internal controls as we prepare for our first management report on internal controls over financial reporting as required by Section 404 of the
Sarbanes-Oxley Act of 2002. In this process we have identified areas of our internal controls requiring improvement, and are in the process of designing and documenting enhanced processes and controls to address these matters. Areas for improvement
include customer purchase order entry and fulfillment of customer order processing, and we are also expecting to implement improved financial information systems during the first half of fiscal year 2006.

Our management, including our Chief Executive Officer and our Chief Financial Officer, does
not expect that our disclosure controls and procedures will necessarily prevent all error and all fraud. A control system, no matter how well conceived and operated, can only provide reasonable, not absolute, assurance that the objectives of the
control system are met. Any control system will reflect inevitable limitations, such as resource constraints, a cost-benefit analysis based on the level of benefit of additional controls relative to their costs, assumptions about the likelihood of
future events and human error. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. Accordingly, our disclosure controls and procedures are designed to provide
reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our Chief Executive Officer and our Chief Financial Officer have concluded, based on their evaluation as of December 31, 2004,
that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure controls and procedures were met.

We are subject from
time to time to legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a
material adverse effect on our consolidated financial position, results of operations or cash flows.

On January 15, 2005,
the Company entered into a Separation Agreement and Release (the Agreement) with Mark Robillard, the Companys former Senior Vice President, Software Products. Pursuant to the Agreement, the Company agreed to pay to Mr. Robillard
the equivalent of his base salary, less applicable withholding, for a period of six (6) months from the date of his separation from the Company, which was January 15, 2005. In addition, Mr. Robillards health insurance benefits will continue
until July 31, 2005. Mr. Robillard released the Company from any claims that he may have otherwise had against the Company. The Agreement is filed herewith as Exhibit 10.1 and is incorporated herein by reference.

We have filed, or incorporated
into this Quarterly Report on Form 10-Q by reference, the exhibits listed on the accompanying Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q.